Overview
Corruption increases the cost of doing business in Kenya. Businesses must budget for informal payments to government officials, customs agents, and intermediaries. These "facilitation payments" are not explicitly taxed but are effective taxes on business revenue. High corruption costs have been cited by investors as a constraint on investment and business expansion.
Facilitation Payments
A business seeking to obtain a government license encounters a base fee (legitimate cost) and informal facilitation payments (bribes). For example: (1) business registration license, base fee KES 5,000, facilitation payment KES 15,000 to registry official, (2) health permit for restaurant, base fee KES 10,000, facilitation payment KES 20,000 to health inspector, (3) import license, base fee KES 50,000, facilitation payment KES 200,000 to customs official.
These facilitation payments are recurring, not one-time. Businesses must pay annually or periodically to maintain operational licenses. Failure to pay informal payments results in harassment (inspections, fines on technical grounds, business closure threats).
Customs and Import Costs
Businesses importing goods face multiple layers of customs corruption: (1) value declaration, where the customs official demands a higher bribe for accepting a lower declared value (allowing undervaluation), (2) clearing agent fees, where clearing agents take cuts that include payments to customs officials, (3) storage and handling fees, where port officials charge excessive fees.
A business importing goods worth USD 100,000 might encounter: legitimate duty (20 percent, USD 20,000), clearing agent fees and bribes (approximately 5-10 percent, USD 5,000-10,000), port storage fees (2-3 percent, USD 2,000-3,000). These costs increase the price of imported goods for consumers and reduce competitiveness of import-dependent businesses.
Transport and Movement of Goods
Businesses transporting goods through Kenya encounter police extortion at roadblocks. Police officers demand informal payments from truck drivers, citing technical violations (overloading, improper documentation) or simply demanding "chai" (tea, slang for bribe).
In some cases, truck drivers budget standing facilitation payments to police: a truck route may encounter 10-15 roadblocks, with each demanding KES 500 to KES 5,000. This accumulates to significant costs. Drivers factor these costs into transportation pricing, increasing costs for consumers.
Land Acquisition Costs
Businesses seeking to establish operations must acquire land. The Lands Registry corruption adds costs: (1) official title transfer fees, (2) informal payments to registry officials for expedited processing, (3) bribes to officials for favorable title decisions if disputes exist, (4) costs of securing land rights in contested properties (land grabbing areas).
Some businesses budget 15-20 percent of land acquisition costs as informal payments related to registry corruption.
World Bank Doing Business Ranking
The World Bank's "Doing Business" index measures the ease of business in countries. Kenya's ranking has declined in recent years, with corruption cited as a factor. The ranking reflects both legal/regulatory complexity and informal payment requirements.
Kenya ranks below regional peers (Botswana, Rwanda) in ease of doing business, with particular weakness in contract enforcement and property rights, areas where corruption is prevalent.
Private Sector Adaptation
Businesses adapt to corruption environments through: (1) forming alliances with government-connected businesspeople who can manage bureaucratic relationships, (2) budgeting explicitly for informal payments in cost projections, (3) choosing to operate in less-regulated sectors or informal economies to avoid corruption payments, (4) relocating operations to less-corrupt countries or regions.
The third and fourth adaptations represent economic inefficiency: businesses avoid legitimate but corrupt sectors, reducing competition and innovation in those sectors. Businesses relocate, taking employment and tax revenue with them.
Impact on Small and Medium Enterprises
Corruption particularly affects small and medium enterprises (SMEs) that lack resources to pay for specialized facilitation. Large corporations maintain teams of facilitation agents and government relations specialists. SMEs must individually navigate each corruption interaction.
SMEs often cannot afford the total facilitation costs and either: (1) operate informally to avoid licensing requirements, (2) remain smaller than they would otherwise, or (3) fail and exit the market. This dynamic limits entrepreneurship and employment creation.
See Also
- Corruption in Kenya Overview
- Civil Service Salaries and Petty Corruption
- Customs Corruption Kenya
- Corruption Measurement and Statistics
- Public Procurement Corruption